Is the Countrywide buyout a BofA blunder?
Posted
May 06 2008, 04:06 PM
by
Matt Koppenheffer
Rating:
After Countrywide's ugly $890 million first quarter loss, speculation has been rampant that Bank of America will try to pull a Houdini and wiggle out of its agreement to buy the mortgage lender. Speculation took to new heights this week when Friedman, Billings, Ramsey analyst Paul Miller strongly cautioned BofA against the deal, and suggested that the bank may try to renegotiate the price down to the $0 to $2 per share level.
The question at hand here really isn't whether Countrywide is going to suck for the foreseeable future -- despite what CEO Angelo Mozilo said late last year, that's pretty much a given. The issue is whether Countrywide will suck more than BofA's proposed buyout price suggests. Since BofA's original buyout offer was at about $4 billion, it's possible that it's already expecting at least another $9 billion hit to Countrywide's book value. That would assume a buyout at one time projected book value, which would be relatively cheap given Countrywide's trading history.
FBR's Miller thinks that it could be significantly worse than that, though, and suggested that loan losses at Countrywide could run in the $20 billion to $30 billion range. At those levels the acquisition certainly would make BofA feel like it had swallowed a brick.
For now at least, BofA has said publicly that it is sticking with the deal and is still targeting the proposed third quarter close date. Since I'd have to assume that the resources that BofA is putting towards doing its due diligence on Countrywide are far greater than what Miller has at his disposal, I'd wager that BofA either has better insight into Countrywide's level of exposure or has a different take on the trajectory of the housing market in the coming months. Of course it could also be gritting its teeth behind closed doors, expecting a mess but not wanting to walk away from the deal.
And speaking of walking away, it's also worth noting that BofA may be very limited in its options for going back to Countrywide with "remember we said we were going to buy you? Just kidding!" The terms of the deal cut off the ability for BofA to walk away due to economic conditions, and the bank already has a previous $2 billion investment on the line, as well as debt it has extended to Countrywide. That's a significant incentive to follow through, but shouldn't be enough if BofA thinks there's a reasonable likelihood that Miller's scenario will play out.
Speculation abounds on The Motley Fool's CAPS community with investors coming out on both sides of the deal. WhenOppsKnock, who's on the bullish side, put his thumb up recently on Countrywide and said:
Countrywide Financial (CFC) is oversold due to the comments of Friedman, Billings, Ramsey & Co. analyst Paul Miller. ... An easy 35 percent gain in less than 2 months. Price should approach $6.50 - $7.00 in 2-4 weeks as the consummation of the merger appears more certain. Analysts have been having a field day see-sawing the price by their comments lately, though. Not a stock for the faint of heart.
Meanwhile, the bearish sahzies thinks that BofA may well be rethinking its options:
The only reason this company is still around is because Bank of America is buying them and now that they're talking about lowering the price again don't expect this stock to do very well...
So what's your take on the Bank of America buyout of Countrywide? Head over to CAPS and let the 100,000 CAPS investors know what you think.
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Disclosure: The author owns shares of Bank of America. The Motley Fool has a disclosure policy.
